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DO’S AND DON’TS OF ONLINE PROMOTIONS
Melissa Landau Steinman, Esq., Partner
Venable, LLP
575 7th Street, NW
Washington, DC 20004
In today’s increasingly competitive marketplace, consumer products and services
companies are using the “new media” to structure increasingly creative and “edgy” prize
promotions. The Internet is an attractive venue for consumer sweepstakes, contests and
giveaways because it provides a flexible and low-cost way to attract a youthful market
using techniques such as viral marketing, with a very low ramp-up time (no need to buy
network ad time, radio time, etc.) Nonetheless, for every successful promotion like
Goodyear’s “Name the Blimp” Contest, an Internet-based contest in which the
manufacturer asked the public to name one of its airships, garnering more than 150
million consumer media impressions and earning more than $3.5 million in comparable
advertising value and an Honorable Mention as the runner-up in the 2007 PR Week
Awards, there are multiple failures – some merely unfortunate, others outright illegal.
Internet prize promotions are regulated under the same federal and state laws that regulate
their "off-line" counterparts. At the federal level, the U.S. Department of Justice, Postal
Service, Federal Communications Commission ("FCC"), and Federal Trade Commission
("FTC") all have jurisdiction over award programs and games of chance. But it is state
laws regulating sweepstakes (typically termed “games of chance” or “drawings”) and
contests (or “games of skill”) that are often the most onerous, and therefore the most
important for compliance purposes. For instance, some states require advance
registration and bonding, or impose highly detailed disclosure requirements when
advertising prize promotions. In addition, these legal restrictions are not the same, or even
necessarily consistent, from one state to another. Accordingly, a promotion should be
reviewed carefully on a state-by-state basis before being offered nationwide. Internet
sweepstakes must also take international laws into account, unless the Official Rules for
the promotion expressly limit participation to US residents.
Elements of a Prize Promotion: Avoiding an Illegal Lottery
Federal and state laws prohibit illegal lotteries (with exceptions for state-sponsored
“Lottos”), which contain three elements:
(1) a prize or award;
(2) an element of chance; and
(3) consideration.
In structuring any promotion, then, the goal is to eliminate at least one of these elements.
In most cases, the presence or absence of the prize component is readily apparent. An
award of free or discounted merchandise or services is an example. In a sweepstakes, the
"chance" aspect of the promotion will also usually be fairly obvious. Certainly a random
drawing or issuing a limited number of winning tickets or game pieces involves chance.
Some less obvious examples that may satisfy the "chance" criterion include those in
which: a prize is awarded to the "100th" store (or Web site) visitor on a particular day; the
amount of the prize depends on the number of people who decide to participate; the
prizes are of unequal value; or, a drawing is used to break a tie, or a single prize is
divided between tied winners. With prize and chance present, the question becomes – is
there consideration?
Consideration, which is a legal term of art, may include a fee for entry, a product
purchase requirement, or simply extensive effort that must be expended to enter. The
payment of money or a required purchase by the promotion participant is enough to
establish the existence of consideration. It is less clear, however, what kind or amount of
personal effort or participation by an entrant will constitute "consideration" for a prize or
chance to enter a promotion. As a rule of thumb, a promotion will typically be deemed to
require consideration if consumers are required to expend substantial time or effort to
enter or participate. Moreover, requiring consumers to submit to significant future
marketing promotions may be viewed as consideration.
Could Internet access constitute consideration for purposes of the federal and state lottery
prohibitions? One ordinarily has to pay money to get connected to the Internet, and
therefore at least indirectly, one has to pay to enter – at least according to the State of
Florida circa 1997. Luckily, Florida reversed its position in a ruling in 1998, and the
Congress adopted this reasoning in the Federal Internet Gambling Prohibition Act (31
U.S.C. § 5362), which expressly excludes Internet access from the definition of
consideration. Those jurisdictions that do not have legislation or attorney general rulings
addressing the issue may nonetheless recognize that, depending on who is sponsoring the
promotion, payment for Internet access is generally flowing to an unrelated third party for
a wholly unrelated service -- i.e., the consideration is not going to the sweepstakes
operator – and that, in any event, the Internet is generally available free of charge at
public locations (e.g., libraries). Until the issue is conclusively resolved, though, a
comparatively conservative way to help reduce residual legal risk in any jurisdictions that
have not adopted a conclusive position on the issue is to set up another free method for
consumers to enter an Internet prize promotion, or, at a minimum, to require that
participants be registered for Internet access at the start of the promotion.
An alternative that can help avoid application of federal lottery prohibitions is to structure
a promotion as a contest or game of skill, rather than a game of chance. For example,
essay competitions, contests for achieving the best success or results with a product or
service, or the like are examples of possible games of skill. The more objective
measurements that can be incorporated into a skill game, the less likely it will violate the
federal (or state) anti-lottery laws. Independent judging is preferable. For instance,
should a contest sponsor face a challenge, a reviewing court or agency must be persuaded
that the contest is primarily dependent on, or requires a sufficient degree of skill (in some
states, any element of chance should be eliminated). Thus, to better ensure that a game is
based on contestants' skill instead of chance, this type of contest should rely as much as
practicable on objective measurements of success.
Sound complicated? It can be. But there are some simple steps you can take to make
sure that your prize promotion is lawful and avoid disasters:
Broad Guidelines For Running A Prize Promotion
1. Free Method of Entry. If an advertiser chooses promote a prize in conjunction with a
sales solicitation or inducement to purchase a product or service, the advertiser must
provide consumers with a free, alternative method of entry. For example, if the promotion
sponsor uses a product order form (paper or electronic) that will also serve as a promotion
entry, consumers must be able to enter the promotion without purchasing a product.
Sweepstakes promotions cannot discriminate between purchasers and non-purchasers -both must be entered on equal terms. One possibility is to give consumers the option of
declining the product, but still entering the promotion, on the same form, and then include
all of the entries in the prize drawing. If the advertiser instead chooses to keep order
forms separate and simply enter the purchasers' names on a promotion entry list, then the
advertiser will need to provide non-purchasing consumers with a separate, free, and
reasonably available means of getting their names on that list. For instance, one could
develop a second form for entry, or set up a separate email address or toll-free 800number that consumers can use to register. Note that even if the advertiser is running a
skill contest, which means that the “chance” element is eliminated and consideration may
be imposed in many states, there are still a number of states that do not permit
consideration in skill contests; you should consult counsel to determine whether to
eliminate residents of those states from eligibility, eliminate the consideration
requirement for residents of those states, or simply eliminate consideration altogether.
It is extremely important to disclose the no purchase method of entry clearly. Not long
ago, Nestle was cited for a candy promotion where children were told to buy candy to see
if it turned their tongues “Prankster Purple.” While “no purchase necessary” language”
was included in the ad, it was so small in comparison to the rest of the ad it was
ineffective. Keep in mind that children are considered to be particularly vulnerable
populations from a promotions perspective, with special rules imposed by a selfregulatory unit of the Better Business Bureau, the Children’s Advertising Review Unit or
CARU.
2. Rules. There should be a set of rules that promotion participants can read and
understand, and which should be provided, or at least disclosed, when the promoter
notifies consumers about the promotion. The rules should clearly and accurately explain
who is qualified to participate, how the promoter will run the promotion and choose the
winner(s), what the prize(s) will be, the value of the prize(s), and the deadline for entry.
The rules should also include the odds of winning, or an estimate of the probable number
of people who will be eligible to participate. In addition, the rules should also explain the
free method of entry if some entrants may also be making a purchase.
Certainly, the rules should include protections for the promotion sponsor, such as
limitations on the number of entries permitted and the manner in which entries may be
submitted (e.g., precluding bulk-mail entries). The promotion rules should be written
carefully, because the sponsor will be legally bound to adhere to them once the promotion
begins. Among the things one should consider in formulating rules are how long the
promotion will run; how many prizes to award; how often to conduct drawings; whether
or not the to limit the number of entries permitted; whether to limit who can participate
(e.g., U.S. residents, people over 18); when and how to notify consumers who win the
prize(s); what to do with any unclaimed awards; how may prizes (or how many times)
consumer are eligible to win; and who will judge entries).
Perhaps the most important provisions to include in the rules are limitations on liability
and disclaimers of warranty, as well as – for any instant-win game – the all-important
“Kraft clause,” which provides protection from liability in the event of printing or
production error. The Kraft clause got its name from an instant-win game run many years
ago when too many winning game pieces were distributed to the general public, creating a
difficult situation, as you can imagine, for Kraft. A similar situation occurred with the
Daily News Scratch ’N’ Match game when the Daily News printed an erroneous winning
number in the paper, leading several individuals to think they had won when in fact they
had not. Although a number of law suits were filed, the Daily News has already won
dismissal in several law suits based on Kraft-type clauses in its Official Rules. Thus,
although litigation in the event of this type of error is nearly inevitable in today’s society,
well-drafted rules can provide risk protection and limit liability should something
catastrophic occur.
3. Odds of Winning. Federal and state laws usually require that an advertiser disclose
the odds of winning each prize. If it is not possible to calculate accurately the precise
odds, that fact should be disclosed, along with the factors that will determine the odds
(e.g., the odds of winning will depend on the number of promotion entries). When
possible, however, odds disclosures should include an estimate of the number of
promotion participants, explaining that the figure is an estimate and, if applicable, the
basis for it. For example, one could estimate the number of people who will be qualified
to participate in the promotion.
4. Eligibility Limitations. It is permissible, and in some circumstances desirable, to limit
contestant eligibility. For example, while Canadian residents may be able to access an
Internet promotion, only games of skill are permitted in Canada. And other countries'
rules may vary even more. As such, it may be desirable to limit eligibility to U.S. citizens
only. Other conditions of participation that might be appropriate in certain circumstances
may include limitations excluding minors, persons affiliated with the sponsor, or
residents of certain states; or requirements to authorize the sponsor to use winners' names,
photographs, or other materials in future promotions, to prepare a list of winners, or for
other purposes. Eligibility should also be conditioned on compliance with the Official
Rules. Restrictions on participation should also avoid exclusions that could expose the
sponsor to charges of unlawful discrimination.
5. Advertising and Solicitation Disclosures. Advertisements for a prize promotion
should disclose as many of the terms and conditions of the promotion as practicable..
Advertisements -- print, radio, television, or Internet -- should at a minimum state the
promotion start and end dates/times, basic eligibility requirements, the odds of winning,
the prizes/number and value, sponsor contact information, and how consumers may
obtain a free set of complete rules. If a promotion is promoted along with a solicitation to
buy products or services, the ads or solicitations must also explain either (1) how
consumers can enter the promotion free of charge, or (2) an address, or local or toll-free
telephone number, that consumers can contact to obtain instructions on the free method of
entry. Additionally, one should not continue to run advertisements, keep the promotion
on a Web site, or otherwise promote a promotion after the deadline for entry expires.
Companies may, of course, also wish to consider including basic copyright and trademark
information.
It is the general practice of companies that engage in nationwide sweepstakes to include a
disclaimer that the promotion is "void where prohibited by law." It may also be useful to
declare the promotion void in states with especially burdensome regulations (e.g., "Void
In New York and Florida"), or which prohibits a particular type of promotion (e.g., "Void
in Vermont," which prohibits one from requiring payment even for games of skill).
However, whether or not this type of disclaimer is effective in insulating the promoter
from liability (including for failure to comply with bonding and registration requirements)
has never been litigated. Accordingly, at the very least, it is advisable to examine the laws
of the states in which one has large numbers of existing customers.
6. Special State Law Considerations
There are many variations in state law. Although not a substitute for reviewing individual
states' requirements, in addition to the caveats and suggestions outlined above, following
the general guidelines below should help improve the likelihood that a promotion would
meet the requirements of a significant number of states' rules:
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Do not use simulated checks or invoices;
Make disclosures in at least 10-point type; express dollar figures or values in
Arabic numerals;
Identify the geographic area covered by the promotion;
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Be sure promotion solicitations include the sponsor's full legal name, street
address, and telephone number;
Do not use contestants' names or personal information for future advertising or
marketing without referencing your corporate privacy policy; follow your privacy
policy at all times;
Some states require that promotion promoters file advance registration statements
with state authorities before conducting a game of chance. For example, New
York and Florida both require advance registration if the value of the prize is over
$5,000.00; prize awards worth over $500 trigger a similar requirement in Rhode
Island for promotions conducted through retail outlets. Arizona law requires that
contest sponsors pre-register certain games of skill. The information required in
the statement varies somewhat, but generally covers the types of information that
must be included in the official rules and in consumer disclosures. New York and
Florida also require that promoters establish a trust or escrow account, or provide
a surety bond that covers the value of the prize. Escrow/trust account funds
generally can not be released without approval of a designated state official,
usually after the promoter has given the state notification and information
concerning the winners. There is usually also a fee for filing these statements.
Certain limited exemptions to the registration requirements may apply.
These “do’s and don’ts” will go a long way towards putting you on the road towards
creating a successful, lawful Internet promotion. Federal and state laws regulating
sweepstakes and contests are complex, and a good advertising lawyer can assist in
making sure that the promotion’s structure and advertising is lawful and creating a good
set of rules. Perhaps the most important thing to remember is that the creativity and lowcost of the Internet as a medium should not be an excuse to avoid legal compliance. If
anything, it should up the ante, as the reach of the Internet is incredibly broad, and legal
compliance becomes all the more important when one’s promotional campaign may be
virally emailed all across cyberspace. You want to make sure that your latest promotion
does not become one of the “don’ts” of promotional history, and that instead you are
accepting your award at next year’s PR Week.